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Worst Stock for 2008: UAL

Have you seen oil prices lately?

I'll be blunt: United Airlines parent UAL (Nasdaq: UAUA) is the worst stock for 2008 because sustainable profits at the carrier depend on cheap oil. Quoting from its reorganization plan, filed with a bankruptcy court in September of 2005:

... Forecasts suggest an average oil price during the Projection Period [Ed. note: 2006 to 2010] in the mid-$40s to $50 per barrel (which is still above historical levels). Accordingly, the Projections assume an oil price of $50 per barrel, as a reasonable estimate, resulting in a cost for jet fuel of $1.478 per gallon, during the Projection Period. [Emphasis added.]

Oil futures closed at almost $93 per barrel on Friday.

You know why this matters. Aircraft fuel is the single largest expense for United and peers like American Airlines parent AMR (NYSE: AMR). Fuel accounted for roughly 24% of revenue for UAL in the third quarter of 2007.

And it could get worse. If press reports are to be believed, airlines are back in merger mode; rising fuel prices may be the cause. Here's how UAL finance chief Jake Brace put it in an interview with trade magazine Airline Business: "(Fuel prices) may help get people to the table."

U.S. Airways (NYSE: LCC) CEO Doug Parker echoed similar sentiments in the same article. Quoting:

If oil is really going to be at $100 a barrel going forward, we have to look at restructuring this business yet again. Perhaps this will compel our industry to do what it has to do and move toward consolidation. [Emphasis added.]

"Has to"? Really? It sure seems like it. According to United's latest 10-Q, the carrier had hedged just 18% of fuel needed for its fourth-quarter operations.

Don't board yet ...United's hubris aside -- oil prices were already $10 per barrel above its $50 target when the airline announced its restructuring plan -- every carrier faces oppressive fuel costs, including merger maniacs Delta (NYSE: DAL) and Northwest (NYSE: NWA). There must be more at work here if I'm to convince you that UAL is the worst of the worst.

Sadly, there is. Here are two more reasons to avoid United right now:

Labor problems. Legendary investor Philip Fisher, a pioneer in the school of thought that birthed growth investing as a discipline, famously eschewed firms that suffer labor problems in his 15 points. Quoting from his classic work Common Stocks and Uncommon Profits: "The difference in the degree of profitability between a company with good personnel relations and one with mediocre personnel relations is far greater than the direct cost of strikes." United executives can attest to that. Two weeks ago, pilots went on the offensive in the media when inclement weather caused an unusual increase in flight cancellations at United's hub at Chicago O'Hare airport. Fair? I've no idea. My point is that, when UAL was suffering embarrassing service problems, its key employees were pointing fingers, which helps exactly no one. And don't tell me that all airlines have this problem; Southwest Airlines (NYSE: LUV) does not. Neither does JetBlue (Nasdaq: JBLU).

Lousy management. But can you blame the pilots? To some degree, sure. But management has mostly earned the kick in the teeth it's getting right now. What kind of executive team would broker a deal like this and still have the audacity to pay itself and employees bonuses while underperforming internal service goals? UAL's, apparently.

But that's my take. If you agree, go here in CAPS to rate UAL to underperform. If not, rate it to outperform. Our editors will tally your votes and, next week, reveal your choice for the worst stock of the New Year.

Fool.com and Rule Breakers contributor Tim Beyers owned shares of Southwest at the time of publication. Click here for Tim's portfolio and here for his latest blog commentary. JetBlue is a former Stock Advisor selection. The Motley Fool's disclosure policy usually flies business class.

Author

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment. Find him online at timbeyers.me or send email to tbeyers@foolcontractors.com. For more insights, follow Tim on Twitter.